A Capitalist Enclave in North Korea Survives

Martin Fackler|The New York Times

Wednesday, 27 Oct 2010 | 8:03 PM ETThe New York Times

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Dorasan, South Korea—Every day, hundreds of South Korean managers and engineers gather here at the steel and glass bus terminal to make an unusual commute, through the minefields and tank traps of the demilitarized zone and into an industrial park that sits just across the border in North Korea.

South Korean Navy Patrol Combat Corvettes stage an anti-submarine exercise at off the western coast town of Taean on May 27, 2010. South Korea's navy staged a major anti-submarine exercise, its first show of strength since tensions with North Korea flared over the sinking of one of Seoul's warships.

At a time when the Koreas have traded threats of military confrontation and cut most economic and diplomatic ties, the Kaesong complex has remained a conspicuous exception.

The complex, the largest economic link created during a relaxation of inter-Korean tensions almost a decade ago, has continued to operate even after the sinking in March of the warship, the Cheonan, and the recent closing of other joint projects.

Political experts say the park remains open for now because neither side believes that it can afford to close it, though for different reasons.

For the isolated North, it is a source of desperately needed jobs and hard currency, pumping $50 million per month into the collapsed North Korean economy. North Korea watchers say it is also one of the few economic successes that the government has to show its people, at a time when the North’s ailing leader, Kim Jong-il, appears to be engineering the succession of his third son, Kim Jong-un.

“The leadership knows that unless it can raise people’s livelihoods, the succession may fail,” said Lim Eul-chul, a professor of North Korean studies at Kyungnam University in Seoul.

For the South’s vibrant economy, the park’s $250 million annual output is just a drop in the bucket. Kaesong has more emotional significance as a symbol that the two Koreas may one day peacefully reunify. Even the administration of President Lee Myung-bak, who has taken a harder line against the North, has been careful to keep the park operating to convey to the North that “the door remains open for improving ties,” as one senior official put it.

Experts and business leaders with dealings in the North say China’s economic rise also makes the park important for the two Koreas. South Korean businesses hope North Korea can become a source of low-wage labor to help them compete with China’s export machine, while the North appears anxious about its excessive economic reliance on China, its closest political ally.

“Neither Korea wants to be responsible for shutting down Kaesong because of its role in our history,” said Yoo Chang-geun, president of SJ Tech, a South Korean electronics company that owns a factory in the park.

None of this has prevented both Koreas from using the industrial park as a point of leverage in the showdown over the Cheonan. The South reduced the number of South Koreans who can live in the complex, to about 500 people now. The North has repeatedly threatened to close the park, most recently saying it would do so if the South resumed propaganda broadcasts by loudspeakers across the demilitarized zone.

Resuming the cold-war-style broadcasts is one of the ways the South has vowed to retaliate for the sinking of the Cheonan.

Despite the recent tensions, South Koreans who work at the complex say they have no difficulty coming or going: on Friday, 489 South Koreans entered the complex, according to South Korea’s Ministry of Unification, which manages inter-Korean relations, a figure that is typical.

On a recent morning, South Korean managers and engineers waiting at the futuristic bus terminal here said the Cheonan’s sinking had made them nervous about their commutes into the North. The buses and trucks move in convoys along a newly constructed highway across the two-mile-wide, heavily fortified border and into the industrial zone, a sprawling collection of prefabricated factories separated by a tall fence and North Korean soldiers from the drably gray North Korean city of Kaesong.

The managers said they did not know how their North Korean employees felt about the ship’s sinking because contact had always been limited, and usually took place through North Korean minders. However, they said North Korean messages over the loudspeakers in the complex had denounced the South’s version of the Cheonan’s sinking as fiction.

Still, the managers’ biggest difficulty has been a decline in orders from South Korean buyers, who they said had stopped buying from Kaesong factories for fear the complex might suddenly be closed down for political reasons. They also said they were worried that the North would close the complex if the South resumed its political broadcasts.

“We are being used as bargaining chips in a political game,” said Jimmy Bae, director of strategic planning at Cuckoo Electronics, a South Korean electronics company that has a $10 million factory in the complex.

While discerning the North’s intentions is always a challenge, South Korean officials say North Korea has made it clear that it wants to keep the complex open. In late May, North Korean officials told South Korean Ministry of Unification officials that they still wanted to develop the complex, the ministry said. North Korea also announced new rules to restrict the ability of South Korean companies to remove equipment from factories in Kaesong — a move that the South Korean news media interpreted as an attempt to discourage companies from pulling out.

Political experts say the North Korean government wants to show its people that Mr. Kim’s successor will be able to improve living standards. The government has been loosening central control over the economy since a disastrous currency reform last fall wiped out the meager personal savings of many North Koreans.

“Kaesong is their best hope for luring foreign investment,” said Cho Bong-hyun, an author of books about the North Korean economy.

China is also a key reason the North wants to keep the park open, say political experts and business leaders. They say the North wants South Korean investment to offset its current, almost total, economic dependence on China.

South Korean companies say they were drawn to the park by the prospect of the North’s 24 million residents’ becoming a pool of low-cost, Korean-speaking labor to help them compete at a time when South Korean wages are approaching those in the leading industrialized nations.

However, many companies that built factories in the park say they have yet to turn a profit, partly because North Korean workers are not as productive as their Chinese rivals. While some managers say they are considering pulling out, others show an almost evangelistic drive to put political considerations above economic.

“We are in Kaesong for reasons of patriotism as well as business,” said Mr. Yoo of S J Tech, who said he had lost $4 million in the park since investing there in 2004. “I’m spreading the seeds of capitalism in North Korea.”